Ahead of NFPs Aussie Sinks on RBA Outlook

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Market Drivers May 6, 2016

RBA Downgrades Outlook sends Aussie below 7400
All eyes on NFPs
Nikkei -0.25% Dax -0.44%
Oil $44/bbl
Gold $1244/oz.

Europe and Asia:
AUD RBA Statement sees inflation 1-2% vs. 2-3%

North America:
CAD Labor Data 8:30

The dollar was slightly weaker ahead of the Non Farm payrolls today in generally quiet Asian and early European trade as traders prepared for the marquee event of the week.

The market is leaning against the buck in pre release jockeying most likely because the early employment data has been mixed with ADP especially coming in markedly worse at 156K versus 205K eyed. That sour note was partially offset by the better readings in the ISM Non Manufacturing employment data which is usually one of the best forecasters of the NFP data. However, given the lackluster readings in other demand gauges over the past month there is enough concern about possible slowdown in economic activity for traders to lean short the buck in pre-NFP trade.

The consensus view calls for a basic repeat of last month’s 215K reading with unemployment rate remaining at 5%. Any result that comes close to those estimates is likely to prove positive for the greenback which has already enjoyed a mild rebound this week, but the real focus will once again be on wages. The forecast is for 0.3% growth and the market will need to see at least those gains to consider any possible monetary action by the Fed. Wage growth has been a huge laggard in this recovery and is the principal reason why demand has been so tepid forcing Fed policymakers to remain accomodative for far longer than they intended.

Elsewhere Aussie was the one standout of the night dropping more than 1 penny from its highs as the RBA Policy Statement degraded its assessment of the economy Down Under reducing its inflation forecasts to 1-2% in 2016 from 2-3% seen earlier. Nevertheless the central bank left its GDP forecasts unchanged at 2-2.5% rate. The sharp decline in inflation expectations led the market to conclude that the RBA was gearing for another rate cut to take the benchmark rate down to 1.5%. Typically the RBA does not stop at one move in its policy cycle. However we believe that the RBA may remain stationary for the time being as long as economic growth continues at the current pace. The latest actions have knocked nearly 4 pennies off the AUD/USD exchange rate and as long as the pair remains below the 80 cent level the central bank is likely to stay pat and observe, saving its policy actions for a more acute contraction in demand. Of course is data surprises to the downside over the next month, especially in job growth turns negative, the prospect of another rate cut will increase significantly.

Meanwhile today the focus remains squarely on US data, but unless the report shows massive variance from expectation the reaction today could be muted. For now the USD/JPY has clear support at 106.00 level while EUR/USD remains near the 1.1400 figure which has served as base for the better part of last month. Only a truly shockingly low report would push the pairs towards the key 105.00 level in USD/JPY and back above 1.1600 for EUR/USD.

Boris Schlossberg
Managing Director

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